Momentum in ESG stocks corrected for market capitalization

Abstract

I investigate the link between momentum returns and ESG scores while controlling for market capitalization through a panel dataset with 115,956 observations covering all 2,294 unique American companies with available ESG data from 2018 to 2022. Through buy-minus-sell, random-effects regression, and fixed-effects regression analyses, I uncover significant momentum premia in my entire sample and high and low ESG-scoring subsamples separately. Within the entire sample, the momentum premia of the high and low ESG-scoring subsamples do not statistically differ after controlling for covariates of momentum returns. ESG scores show a small negative correlation with momentum returns in the high market capitalization subsample. I find a small positive correlation within the low market capitalization subsample. Therefore, I prove the effect of ESG scores on momentum returns irrespective of market capitalization. I do not support the influence of market capitalization due to mixed evidence. Investors can pursue momentum profits while incorporating ESG scores. However, they should not expect different momentum premia when using portfolios with high ESG scores compared to portfolios with low ESG scores if they do not specifically focus on companies with high or low market capitalizations.

Keywords: momentum, sustainable investing, ESG, market capitalization